How are oil wells valued?

Answer 1

This is a very good question. Valuations are based on the outlook of revenues from production and associated costs. I need to add some to this answer.

In the US, private companies and individuals can own mineral rights. Outside of the US, the national government has ownership, but normally they lease out large holdings to oil companies. Lease sales are also done by the US for offshore blocks.

Now, valuations can be made for mineral rights within the US. The valuation will depend on many factors, including the price of oil, the cost to maintain the wellls, and potential for new wells. Generally, valuations will be done on the field, rather than an individual well.

Valuations for leases which may contain many fields can become more complex. If no oil has yet to be discovered on a lease, the investor must rely on seismic and geological interpretation, plus information gained from dry holes.

Valuations of leases normally account for taxes or other payments to governments. The contractual terms are often referred to a fiscal regimes. One form of contracts used in offshore leases in the Production Sharing Contract. This type of contract can make valuations more complicated, as government payments change during the contract life.

There are numerous valuation measures, including net present value, discount rate of return, payout, and present worth index.